Sahara ads indirectly confirm some of Sebi's allegations

The Sahara Group, in massive two-page advertisements in the print media today, has effectively confirmed that it had begun paying off investors in optionally fully convertible debentures (OFCDs), issued illegally by two of its companies, Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC).

It has also indirectly confirmed that some of its investor documentation may be less than foolproof.

In a judgment dated 31 August this year, the Supreme Court had ordered the refund of all OFCD outstandings with 15 percent interest to Sebi, which, in turn, was the verify the documentation of the investors before repayment.

Even though an amount of Rs 24,029 crore was shown as owed to nearly 30 million investors as in August 2011, Sahara recently offered Sebi a draft-which it declined to accept -for Rs 5,120 crore for the remaining investors. This means nearly Rs 19,000 crore has been paid off between August 2011 and now.

The question is: did Sahara contravene Supreme Court orders in paying off the balances without Sebi verification? In repeated advertisements in the media, Sebi warned OFCD investors not to allow Sahara to convert their money into investments in other group/associate companies, including the Sahara Q Shops and Sahara Credit Society.

The Sahara ad has this to say: “For the past 30 years, we have observed that our field workers try their best to pursue the depositors/investors to reinvest in some other scheme of the group because they get their livelihood from that by way of commission.”

Is this a veiled admission that OFCD money also got converted to “other schemes” by Sahara commission agents? More importantly, does this flout the court’s orders to pay Sebi, and route the final disbursements through the regulator or its appointed agents?

According to the Sahara ad, the complaints made by disgruntled investors to Sebi were done with ulterior motives. In response, Sebi issued ads warning investors from being taken in by Sahara agents to shift their investments. “We have always observed that a minuscule percentage time and again (few hundreds/thousands out of crores) keep on sending strong, nasty and concocted complaints to the Reserve Bank of India, now to Sebi, with a copy to Hon’ble President, Hon’ble Prime Minister, etc, etc. They do it with greed and expectation to pressurize us for squeezing extra money benefits, concessions, etc, from the company (sic).”

It’s difficult to believe that “hundreds/thousands” of small investors are trying to arm-twist a group as big as Sahara, with all its political clout, but this is what the group claims.

But more important is the tacit admission that it cannot easily identify its own investors from the records.

The Sebi order of 23 June 2011 , which first ordered SIREC and SHIC to refund the OFCD money, written by Whole-Time Director KM Abraham, noted that “the two companies… are without doubt, clearly in gross violation of the provisions of the laws applicable to public companies making offers of securities to the public. (They) seem to be unable to furnish even basic data on the identity of its (sic) own investors..”.

To find out the names of its investors, SIREC apparently needed the help of professional accounting firms. Asked Abraham in his order: “If the identity of the investors and addresses themselves are not readily available with the firm- and the compilation and authentication of the data across the thousands of service centres will have to, as admitted by SIREC, require the support of professional accounting firms at this stage, then I wonder what real safeguards can possibly be there in place for investor protection?”

The Supreme Court order of 31 August 2012, which confirmed the Sebi refund order, also made caustic remarks on Sahara’s data-keeping .

On perusing the documents, the Supreme Court observed that ‘Kalawati’ was one of the investors. Her address showed that she was a ‘resident’ of Uchahara, SK Nagar, UP, and the agent who brought in her investment of Rs 1,600 is called ‘Haridwar’ of Bani Road, Sant Kabir Nagar, said a report in The Economic Times last September.

In short, both Sebi and the court were disinclined to believe the records of Sahara.

Sahara’s explanation in the ad is this: “Surprisingly, in the Hindi belt particularly, we find the same name of hundred different persons, even the area names, including village, mohalla, towns, cities match. Most surprisingly, many, many fathers/husbands also match, so it is difficult to authentically ascertain the pattern of reinvestment, but through verbal conversations and also through computer data matching we try to understand the pattern (sic).”

This is an astonishing admission. It suggests that names can be similar, fathers and husbands’ names can be similar, and that it is difficult to “authentically ascertain” the identities of some investors.

So how is Sebi or anyone to figure out whether Sahara repaid the right people or the wrong people?

The Supreme Court judgment said: “We make it clear that if the documents produced by Saharas are not found genuine or acceptable, then the Sebi (WTM, Whole-Time Member) would proceed as if the Saharas had not refunded any amount to the real and genuine subscribers who had invested money through RHPs (Red Herring Prospectuses) dated 13.3.2008 and 16.10.2009.”

In making refunds without authentication by Sebi, Sahara may be asking for trouble. The Supreme Court order clearly said that Sebi will have the final word on this. The order said if Sebi finds “the genuineness of the subscribers…doubtful”, the regulator will give Sahara an opportunity to “satisfactorily establish the same as being legitimate and valid. It shall be open to the Saharas, in such an eventuality, to associate the concerned subscribers to establish their claims. The decision of Sebi (WTM) in this behalf will be final and binding on Saharas as well as the subscribers.”

When Sebi is clearly given the last word on this, one wonders what the Sahara Group is trying to achieve with its ads.